The Government's official house price index, produced by the Land Registry, has been accused of misleading homebuyers and policymakers after it emerged that it excludes repossessions and auctions on the grounds that they do not reflect the 'full market value' of the sale" gasps The Graun"The latest Land Registry figures, published on Friday, showed a 10.1 per cent annual fall in prices across England and Wales, a considerably more benign figure than the indices from Halifax and Nationwide, which reveal prices falling by 15 per cent and 13.9 per cent respectively."

*sigh*

That HM Land Registry compiles figures this way has been common knowledge for ages, at least among those who take an interest in these matters. They focus on consecutive sales of the same property ('Repeat Sales Regression') and exclude repo's and auctions for a good reason. Repossessed properties sold at auctions usually sell for less than they otherwise would, so it would overstate price rises if you compared the price that developers pay for a quick sale at auction with the amount that they sell if for later on once they've tarted it up and marketed it. Now that property prices are plummeting again, to include repo's and auctions would overstate price falls.

AFAIAA, they also exclude the first sale of new builds as there is no earlier comparative. Thus the new builds that are now being sold at auction for half their original selling price haven't influenced the official figures at all.

In other words, if you are thinking of selling or buying at an auction, HM Land Registry figures are absolutely irrelevant. I'm sure that people who buy and sell at auction would be dimly aware of that. All that "policymakers" care about is propping up house prices, facts and logic don't matter to them anyway.

As to the second contention, that HM Land Registry's figures show smaller falls that the Halifax or Nationwide, that's mainly a two-month time lag thing, as I have pointed out before.

Quick check: HM Land Registry's October figures (released at the end of November) show year-on-year fall 10.1%, month-on-month 1.5%. Nationwide's August figures (released at the end of August) showed year-on-year fall 10.5% and month-on-month 1.9%, so that two-month rule still holds.

Most cover versions are rubbish, but there are some hatchet jobs that actually make the world a better place. Here's my non-exhaustive list in no particular order:

Aerosmith "Come together" (Beatles) and "Walking in the sand" (Morton, orig. performed by Shangri-Las). It's worth mentioning that the Aerosmith/Run DMC version of "Walk this way" is incredibly dull and leaden, compared to the original, and that the Girls Aloud/Sugababes version was absolutely dire.

Ron Wood "I can't stand the rain" (orig. performed by Ann Peebles, beating Eruption to it by several years)

Primal Scream "Loaded" and Guns'n'Roses "Sympathy for the devil" ("Sympathy for the devil" by Rolling Stones)

Guns'n'Roses "Knockin' on heaven's dooor" (Bob Dylan). At this juncture I should mention the "Rise" by Gabrielle, which would be a great song, but they messed up the sample - there's an awkward split-second gap every time it repeats. Incredibly irritating.

Rolling Stones "Like a rolling stone" (Bob Dylan)

Sugababes "Freak like me" (lyrics from "Freak like me" by Anita Howard and music from "Are friends electric?" by Tubeway Army)

Coda: I'd always complained that my iPod just isn't loud enough. I used proper big headphones when compiling this list, rather than the little in-ear ones, and I am staggered at how loud it really is. You live and learn.

General Motors Corp (GM.N: Quote, Profile, Research, Stock Buzz) is pushing some bondholders to swap their debt for equity, as Chief Executive Rick Wagoner tries to keep the automaker out of a Chapter 11 bankruptcy that would likely cost him his job, The Wall Street Journal said late Friday, citing people familiar with the plan...

Last week, the U.S. Congress rejected pleas from GM, Ford Motor Co and Chrysler for $25 billion of loans, and asked the automakers to submit detailed turnaround plans...

A debt swap could leave many unsecured debtholders with big losses. Many GM bonds have been trading at small fractions of their face values, suggesting that many investors are uncertain about the automaker's ability to pay its debts.

The key to all this is in the last two paragraphs:

"Many GM bonds have been trading at small fractions of their face values...". Modigliani & Miller won a Nobel Prize for pointing out that the total 'enterprise value' of a company is usually equal to the value of all its shares and its bonds. Corporate finance wizards claim that companies can boost their own value in the good times by replacing shares with bonds (in other words, using borrowings to fund a share buy back), if this is true, then in the bad times, the reverse must also apply (in other words, doing a debt-for-equity-swap). And seeing as many GM bond holders have already lost a lot of their money, it won't hurt them for those bonds to be exchanged for shares of an equivalent market value, or, from a negotiating point of view, shares to a slightly higher market value.

Further, why should Congress use taxpayers' money to make loans to (i.e. buy bonds issued by) companies if that money would just be used to repay existing bonds, i.e. boost their market value? That wouldn't produce a single automobile or save a single job.

Saturday, 29 November 2008

Here's another chart showing the components of house prices since Q4 1952, adjusted for wages growth (click to enlarge):As you can see, in the long run, prices increase pretty much in line with earnings, which is hardly surprising - housing in the UK is in more or less fixed supply and housing is a normal good. This makes a mockery of the idea that property ownership can be a route to riches, or even to a comfortable retirement, except in the short term and for a minority of people who bail out in time.

As I have said before, the bubble periods tend to precede nasty recessions and economic turmoil, I would go one further and argue that the bubbles actually cause the subsequent recessions; this is because asset price bubbles and credit bubbles are two sides of the same coin - they reinforce each other on the way up (as well as steering the economy in totally the wrong direction); the same applies to house price crashes and credit crunches.

As I have also said before, there are two main arguments for having a flat rate tax of (say) 5% per annum on capital values in excess of the pure bricks and mortar value:

1. A 5% tax on the 'location value' would raise an average of £1,000-plus per home, just about enough to replace the main property and wealth-related taxes (Council Tax less Council Tax Benefit, Stamp Duty Land Tax, Inheritance Tax), which would be a welcome simplification and be neither 'regressive' nor 'jealousy surcharge'.

2. A 5% tax on the 'bubble element' would dampen off bubbles as they arise. Let's assume that the average house prices drops to £100,000 again and the system is then introduced, in addition to the £1,000 'location value tax', there would also be an extra £500 bubble tax (enough to replace the other property and wealth related taxes like Capital Gains Tax, the TV licence fee, insurance premium tax and VAT on domestic fuel and home extensions, for example). If house prices then jumped ten per cent faster than wages in a year, people's LVT bills would go up, on average by a further £500, probably sufficient to nudge people into bringing empty properties back on to the market or to rent out a room; nudging others into trading down, and deterring first time buyers (whose rent would not have gone up by £500, especially if they still live at home) from entering the market; and pushing down the profits of landlords by £500, who would then be more likely to sell up (and bank a net profit of £9,500) or discouraging them from buying in the first place. Thus bubbles are unlikely to recur, and even if they do, a sensible government would use the tax on the 'bubble element' to pay off the national debt, or "to fix the roof while the sun is shining", as George Osborne would say.

3. The figures for bricks and mortar (average £70,000 per home) and true location value (average £20,000 per home) are to some extent arbitrary, you can make up your own assumptions on this. For my previous chart I had guesstimated £75,000 rebuild costs at 2007 prices, and land values around £25,000 per plot at their low-point.

Tee hee, ElComm is going to "re-open its investigation" into the £2.4 million donation that the Lib Dems received from an ineligible donor.

Which begs the question, why did they close the investigation in the first place? What appears to have triggered this is that the man behind the company that made the ineligible donation has been convicted of fraud. That is neither here nor there. As the article explains, PPERA "forbid[s] political parties from accepting corporate donations unless the companies are actually carrying on business [in the UK]."

Nick Clegg moans that "We took that money in good faith, everybody recognises. It has been recognised that we did all the due diligence checks we could have done, totally unaware of the crimes of which Michael Brown has now been indicted. Beyond that I can't comment."

What a twat!

1. What due diligence? A quick search at Companies House shows the company was incorporated on 15 March 2004 and has never filed any accounts whatsoever. Fair enough, the Lib Dems took the money to fund their 2005 general election campaign, so at the time they accepted it, the company's first set of accounts weren't overdue, but crikey. I wonder what "due diligence" they did? When proper accountants and lawyers do 'due diligence' they generate files and files of paper with copies of tax returns, invoices, business plans, trading history etc etc.

2. Michael Brown hasn't just been "indicted", has he? That's a fancy way of saying "charged", he's been "convicted", FFS. In any event, as mentioned above, whether he is a fraudster or not, and whether they were aware of it or not is neither here nor.

Anyway, a quick glance at the Lib Dems' 2007 accounts shows that this would push the federal party into a £1.3 million deficit. Looking on the bright side, from their point of view, they'd only need £20 from each of their 65,400 members to become solvent again. Plus a heck of a lot more to fight next year's EU Parliament elections.

Harriet Harman was let off the hook for similar skullduggery, of course, although there's still hope that Peter Hain will be forced to forfeit upwards of £100,000, I suppose.

Friday, 28 November 2008

FWIW, we have owned the same two hot water bottles** for over ten years. If and when we use them, I always fill them to the brim with freshly boiled water from the kettle and they are still going strong. That way, they stay warm for about twelve hours.

On a couple of more drunken occasions I have even managed to pour boiling water all over one hand; after the initial shock, the pain subsides and my hand was no worse for wear the following day (not that I am recommending this).

Just sayin', is all.

* The bansturbators seem to be 'hotter' on this in ANZ than in the UK.

** We 'splashed out' on two new ones for the kids this week, they bear the same instructions, plus extra hints and tips like 'fill them two thirds full' (doh!) and 'expel excess air'. Yeah right, wait 'til somebody squeezes too hard and fires a jet of boiling water into his own face.

Now that Damian Green knows what it's like to be the victim of politically motivated police-state thuggery of questionable legality, should we expect him to ask the Home Secretary to relinquish these powers once the Tories are in government?

So the government is going to reclassify cannabis yet again (Metro, Thu)? Doesn't this prove that it has completely lost the plot in its battle against drugs? Why not legalise, regulate and tax it? With the thousands of tonnes cunsumed in Britain every year, surely a cannabis tax would be a viable way out of the credit crunch?

Thursday, 27 November 2008

I have had interesting discussions recently with chaps from The Renegade Economist and Systemic Fiscal Reform, and while I disagree with them on a lot of things (and they no doubt with me), we have a lot of common ground.

It now strikes me that there are two main arguments* why Land Value Tax is superior to just about any other form of taxation (except "user charges" like fuel duties to cover the cost of roads, for example). This is because land values consist of two distinct elements, the location value (which is fairly stable) and the speculative element, that goes up and down in approx. eighteen year cycles:

1. The 'left wing' or 'humane' argument is that 'local services' (as defined) should be paid out of a tax on location values rather than taxes on incomes/production, because otherwise tenants have to pay double - they pay their landlords for the value of local services (because the value is included in their rent); and they pay again for the cost of local services (out of their income tax).

As the tenant's loss is the landlord's gain, this is a transfer from productive workers to land owners. We can extend this to first-time-buyers. A large part of the price they pay for a home is the net present value of local services, for which they themselves will be forced to pay out of their own income tax. For existing home owners, it's neither here nor there whether they pay a bit more income tax or a bit less income tax and a bit more LVT. Those who can cash in are people who can sell up and move abroad; if local services are funded out of income tax, they can effectively claim a refund of all the income tax that they would have paid had they stayed here.

2. The 'right wing' or 'free market liberal' argument is that these house price bubbles/credit bubbles steer the economy in the wrong direction; when the bubble bursts, the subsequent recession more than wipes out any illusory growth during the bubble period and we are back to where we started, instead of having gradually progressed to a more sophisticated and successful economy**.

Mathematically, and in real life, high house prices drag land values up with them. If there were a fairly savage tax on the 'bubble' element of house prices or land values, which is reflected in capital values but not in rental values, this would dampen down any bubble before it had started.

Just sayin', is all.

* There is also the Christian angle that God created The Earth for mankind to share; if you declare land to be your own and hence deprive others of the benefit thereof, it is only fair that you compensate your fellow man by paying for the privilege; and the Greenie angle that it discourages 'urban sprawl', which in turn reduces commuting distances (and pollution) and leaves the countryside untouched. Fair points as well, but I am neither a Christian nor a Greenie.

** Wouldn't we be in a slightly better position to 'weather the downturn', if instead of having an army of soon-to-be-unemployed and/or repossessed property developers, buy-to-letters, equity release junkies, estate agents and structured finance derivative traders (whose collective efforts over the last ten years have, with the benefit of hindsight, added bugger all to the value of the economy), we had an army of scientists, entrepreneurs, bio-chemists, plumbers, maths teachers, bus drivers whatever?

After a week of polling and a very good turnout of 118 (thanks to everybody who voted, as ever), I can announce the final results as follows:

The best way to deal with Somali pirates would be to ...

Storm the tanker and kill them all/make them walk the plank - 41%

Nuke their harbour/mine their harbour - 21%

Just ignore them. How would they sell two million barrels of oil? - 17%

Grant them all asylum in the UK - 10%

Send even more aid payments to Somalia - 6%

Take the entire population of Somalia hostage - 4%

Pay the ransom - 1%

I included the "grant them all asylum" and "send even more aid payments to Somalia" options as a joke, of course. As Wolfie pointed out in the comments, anybody who voted for "grant them all asylum" should be deported. To Somalia.

“The rate of house price falls moderated significantly in November. Prices fell by just 0.4% in the month compared with 1.3% in October. This brings the annual rate of house price falls to 13.9%, down from 14.6% last month. The price of a typical house is now £158,442. This is about £25,000 less than this time last year but is still about £25,000 higher than in November 2003."

Oh noes! We visited 2003 a few months ago, the comparison with today looked a lot rosier then didn't it?

"The price of a typical house in the UK is now £179,110, only £2,027 more than this time last year. However, prices are still 11% higher than two years ago and 47% higher than five years ago - the equivalent of a price rise of more than £30* per day for the last five years."

Wednesday, 26 November 2008

Sir, Perhaps the owners and operators seeking naval protection off the Horn of Africa should appeal to their respective flag states. Surely they investigated the capabilities of the naval forces in Panama, the Marshall Islands and Liberia before they “flagged out” their vessels’ registry to these or other non-maritime nations.

That these owners would now demand action from the world’s naval powers under the guise of global commerce is a predictable display of hubris. These “flag of convenience” operators should not be afforded the naval assets of the nations they ran away from [sic].

In today’s world, some buccaneers wear suits.

Barry Shea, Sunapee, New Hampshire, USA.

(If shipping companies can choose to pay higher taxes in exchange for flying the flag of a larger naval power and being afforded the protection of its navy, that sounds like a sort of seaborne Land Value Tax to me. Bring it on!)

Sir, I have sailed in a very small yacht off the Horn of Africa and I have worked in the shipping industry and aboard a cargo ship. As everyone has already pointed out, 450 nautical miles (830km) south-east of the coast of Kenya is a long way out into the Indian Ocean. It is too far to make a return journey in the type of fast outboard-driven boats that these pirates use. You would run out of fuel.

The pirates must have known where the ship was. This was an inside job. A crewman with a GPS and a sat phone, or one of the ship’s position reports falling into the wrong hands?

Sir, I have seldom read and heard so much rubbish about the piracy problem aided and abetted by the non-response from governments around the world.

The Malacca pirates, once they started hitting the shipowners in the pocket with increased insurance costs, were soon put to flight by the local governments. The Indian navy’s success in sinking a mother ship is a precursor of solving the problem: robust action with imagination*.

The pirates’ nest should be routed out, the anchored ships taken back, and the mother ships sunk on sight. It would once and for all end this scourge which should never have been allowed to develop.

I sailed through these waters in 2000 in my own yacht when the piracy problem was just beginning.

Following helpful comments on the earlier version, here's the new, improved chart showing the inflation-adjusted (in constant 2007 prices) components of house prices (i.e. land values and bricks and mortar values) from 1983 to 2007:

To sum up; your investment is not in "bricks and mortar" at all; even at the low point in the mid 1990s, at least a third (possibly half) of your investment was in the underlying land value. As the chart shows, the land value can fall by more than half in five years and take a further fourteen years to recover ...

2. Land values are taken from the Valuation Office Agency's Residential Building Land Index, figures for 'England and Wales excluding London', adjusted for RPI inflation and assuming ten-and-a-half homes per acre (of course the average residential plot is a lot smaller than that, but you have to deduct roads, pavements, grass verges, kids' playgrounds, electricity sub-stations and so on). This is a tad less than typical new build densities of twelve per acre, but takes into account the fact that older estates had bigger gardens, wider grass verges etc.

3. The bricks and mortar value assumes that the (re)build cost/value increases one per cent faster than retail prices, because half the cost relates to labour; and wages/salaries tend to increase two per cent faster than retail prices.

4. Unfortunately, 1 does not always equal 2 plus 3; so I have also entered the residual difference (as an absolute figure). This difference was nearly £20,000 from 1995 to 2001. I can only guess that this was because new builds were more in demand than existing homes during that period, in other words, new builds sold at a £20,000 premium (?). For the remainder of the period, this residual difference was fairly negligible.

As I have been saying for a while, the only sensible way to 'fix' the banks is debt-for-equity-swaps, i.e. medium term liabilities (bonds etc that the banks have issued to raise money from investors) are converted to a permanent claim on the business (i.e. shares). A lot of people respond with incredulity, "If it's so simple, why didn't UK banks just do it?". You can make up your own answer to that - conspiracy or cock-up - but here's another example from real life:

Taylor Wimpey is set to yield to pressure from its lenders to offer them some equity as part of a package to refinance its £1.9bn net debt pile. The housebuilder’s banks and other lenders are set to own a single-digit stake in the business, and to charge much higher interest rates in exchange for waiving current conditions surrounding the debt, according to people familiar with the situation...

The equity aspect will sweeten the deal for lenders, which have so far not committed to waiving Taylor Wimpey’s debt covenants ... However, some analysts questioned the benefits of any deal for shareholders...*

In other words, private businesses like Taylor Wimpey can - and do - sort this out with private banks without the need for government involvement. If the government had resisted the tempation to part-nationalise UK banks using taxpayers' finest, then ultimately this is what would UK banks would have done (they are supposed to be world leader's in this sort of 'financial engineering').

Just sayin', is all.

* Of course, depending on the precise terms of the deal, existing shareholders might come out better or worse off. But seeing as the 'total enterprise value' is constant , whether financed by banks loans or share capital (see also The Miller and Modigliani Theorem), it is not too difficult to arrive at a solution satisfactory to shareholders as well as banks.

The first phase of the government's controversial identity card scheme has come into force. Foreigners applying for student and marriage visas will be the first to need the cards to extend their stays in Britain as they are often suspec­ted of trying to abuse the immigration system.

Up to 400 criminals involved in a foreign prisoner scandal, including some of the worst offenders, have been told they can stay in Britain, the Home Office has disclosed. Less than a third of the 1,013 convicts have been deported two and half years after the scandal broke and subsequently cost Charles Clarke his job as Home Secretary. And many more could end up staying because 90 are still missing, 31 are in jail again and 160 are still going through the process.

Tuesday, 25 November 2008

To sum up; your investment is not in "bricks and mortar" at all; even at the low point in the early/mid 1990s, half of your investment was in the underlying land value. And as the chart shows, the land value can fall by more than half in five years ...

Land values are taken from the Valuation Office Agency's Residential Building Land Index, figures for 'England and Wales excluding London', adjusted for RPI inflation and assuming nine homes per acre (of course the average residential plot is a lot less than one-ninth of an acre, but you have to deduct roads, pavements, grass verges, kids' playgrounds, electricity sub-stations and so on).

The bricks and mortar value is simply house prices minus land values. As a balancing figure, it fluctuates about the average of £45,000; of course in real life the true 'value' would be much more stable.

It is reported that the 45% income tax rate would apply to the "top one per cent" of earners (about 300,000 taxpayers) and raise an extra £2 billion per annum. The top one per cent of earners has an average income of (say) £300,000, so the extra tax per earner would be £7,500.

300,000 people x £7,500 each = £2.25 billion.

*sigh*

Let's assume that five per cent of them leave the UK (15,000 taxpayers) , and that those five per cent have average taxable incomes of £300,000. For each one that leaves, income tax receipts (not to mention National Insurance etc) goes down by £135,000. So we have to deduct those 'losses' from the expected gain.

Alistair Darling, chancellor of the exchequer, has scrapped empty property rates* for properties with an estimated value of less than £250,000 ... Martin Davenport, rating partner at Hartnell Taylor Cook, said: "It will help small businesses ...

Of course! Let's not forget those thousands of small businesses occupying empty business premises the length and breadth of the land ... er ...

* Of course taxing the value of empty buildings in themselves is counter-productive, because at the margin, landlords will demolish empty buildings in order to reduce supply and hence put a floor under rents that they can charge for the occupied properties. This problem would be solved at a stroke if it were only the site value that were taxed, whether there are building on it or not.

I agree with the broad aims of this legislation, but there is no reason to assume it will achieve its purpose, none in the slightest.

Ergo, it might more sense to go on the opposite tack, and reduce the hallowed legal status that marriage has, HH proposing.

For example, if there were no presumption that a foreign spouse has automatic right to be given a UK residence visa (which is the reason for the vast majority of forced marriages), and instead had to apply for a residence permit on his or her own merits, a lot of the problem would sort itself out.

Chancellor Alistair Darling said the Government would work on plans to underwrite mortgage financing in a bid to stimulate the sector ...

Yup. Having noticed over the past few weeks that neither the £37 billion bank bail-out nor the 150 bps cut in the BoE base rate have had the desired effect of magically reinflating the house price bubble, the gummint are now going to "underwrite mortgage finance", whence it is a small step to lending directly to borrowers (possibly channelled discreetly via NR or B&B). That's a polite way of saying "throwing taxpayers' finest at the problem".

... Banks traditionally sell on bundles of their mortgages to investors, in a process known as securitisation, to raise the money they need to lend to consumers. But the securitisation market has dried up in the wake of the problems in the US sub-prime mortgage sector, leaving banks increasingly reliant on using money from depositors to fund their mortgage lending.

Dude, WTF? The whole securitisation nonsense has mushroomed over the last five or ten years, it's not "traditional". Traditional is when banks and building societies rely on ... er ... money from depositors.

Mr Darling said: "To implement Sir James's recommendation, the Government would need to obtain State Aid approval from the European Commission and resolve some technical and practical considerations. But we will proceed to work up a detailed scheme based on his recommendations and seek State Aid approval to proceed."

When our only hope is the EU ... say no more.

Meanwhile, measures to help struggling homeowners were also announced by the Chancellor. If someone is having difficulty paying their mortgage, lenders will wait at least three months before initiating repossession proceedings. In addition a scheme that covers mortgage interest payments for those who lose their jobs will be extended to cover mortgages up to £200,000. "This will help ease worries for homeowners who have lost their jobs as they look for new employment," the Chancellor said.

Not forgetting that for every over-indebted family that isn't repossessed, there's another more cautious family in rented accommodation who'd love to buy ... it's a zero sum game.

£200,000? Not only is that up from the £175,000 first suggested a few weeks ago, that's a handsome slab of property in most parts of the country. Shouldn't the the government be, er, reducing the enormous burden of tax and regulations to ensure that not as many jobs are lost in the first place? Are we to have a two-tier Welfare State, the unemployed on council estates and the better class unemployed who managed to sign up for an unaffordable mortgage shortly before losing their job?

The Government also announced £15 million of new funding for debt advice in the Pre-Budget Report.

Housing minister Margaret Beckett said: "... Everyone needs to do their bit to help families avoid the traumatic impact of repossession, and we expect lenders to do more to build on work already under way to help their customers."

FFS. I sold to rent in anticipation of a house price crash. My decision, my risk. Why should I now "do my bit" (i.e. pay loads of extra taxes) to subsidise other people's mortgages, prevent repossessions and prop up house prices? I want them to fall as far and as fast as possible, to be honest.

Two out of three jobs created since 1998 have been in parts of the economy dominated by public services, casting a fresh light on Labour's economic stewardship, an FT investigation shows. The dominance of the public sector has been so pronounced that in some areas the number employed in the private sector fell between 1998 and 2006 in spite of the strength of the economy over that period...

The ONS's flagship survey shows that 1.3m of the total jobs created were in health, education, social care and public administration, implying the rate of job creation was twice as fast in the parts of the economy dominated by public sector money than in the rest of the economy.

Only, the increase is far more than 1.3m. My reader's letter, published in the FT on 19 April 2007:

Sir,

Your article "Not working: why France may find its social model exacts too high a price" (FT, 16 April) states "Since 1982 the state has hired an additional 1m employees, taking its total payroll to 5m. The public sector now employs almost one-quarter of France's labour force...About half the French electorate is dependent on the state for wages, benefits or pensions".

Substitute "1997" for "1982" and "7m"* for "5m" (using the International Labour Organisation's definition of public sector employment) and much the same applies to the UK.

Yours faithfully etc

* Actually, it turns out that there are now 8 million (not just 7 million) on the public payroll in the UK (see column L-N in Table 5.2 of this), as against 6 million in 1997 (an increase of 2 million, not 1.3 million), but hey..

Sunday, 23 November 2008

On the basis of other newspaper articles, comments thereon, other 'blogs, email exchanges and so on, I get the impression that the mooted reduction in the standard rate of VAT in tomorrow's PBR is not going down particularly well. The main objections seem to be:

1. VAT is a tax on consumption. We should be cutting taxes on production, not on consumption.

2. A 2.5% VAT cut would reduce the price of goods or services for which the consumer currently pays £100 by only £2.22. That is of neglible benefit to the consumer and isn't enough to 'get Britain spending again'.

3. It will suck in imports.

*sigh*

Reducing the standard rate of VAT to the lowest rate allowed by the EU would be one of the few good things that this government has ever done, but to appreciate why, you must first shake off thirty years of lies and brainwashing (perpetuated by the self-same people who are now not getting any plaudits ... ) and realise that VAT is not 'a consumption tax borne by the consumer that does not affect producers', it is a turnover tax on VAT-registered businesses! ( With no deduction for other expenses, so it is payable even if the tax pushes a business from making small profits into making losses - *see footnote)

Standard rate VAT applies to services as well as goods. The UK is a largely service based economy (of course it is, we have enough cars and fridges and TV sets and stuff). With services there is no distinction between consumption and production - you sit in the barber's chair, he cuts your hair. Does anybody believe that we can invent a tax that magically discourages you from sitting in a barber's chair (consuming) while simultaneously encouraging the barber to cut hair (producing)?

Even if you buy new physical goods that were manufactured overseas, more than half of the retail price goes to the retailer, his landlord, the shop workers, the distributor, the lorry driver, the warehouseman - all UK based.

Further, let's look at the numbers. Total UK corporation tax receipts were expected to be £50 billion or so this year, of which £10 billion is North Sea oil tax and half of the rest was supposed to be from UK banks. In other words, the rest of UK plc paid £20 billion corporation tax.

Total VAT receipts, on the other hand, were expected to be £80 billlion. Remembering that banks don't pay VAT on their turnover or profits, that means the non-bank part of UK plc paid four time as much in VAT as it did in corporation tax. So VAT is the tax that hits most businesses hardest, not corporation tax.

So it is irrelevant whether businesses 'pass on' the VAT reduction by reducing prices by two percent (and seeing as VAT is a turnover tax, there is no strong reason to assume that they will). The point is, instead of handing over 14.89% of their gross turnover to HM Revenue & Customs, they will only have to hand over 13.04%. That extra 1.85% of turnover will be used to keep up with the rent, the bank interest, paying wages and so on, and hopefully staying in business. What people are really worried about is their employer going out of business and them losing their jobs, not whether the price of what they spent their net wages on goes down a per cent or two.

But ... you will only understand this post if you understand subtle but important economic concepts like the difference between the legal and economic incidence of a tax. I, for once, wish the Nulab government the best of British luck on this one.

a) HMRC collects 17.5% of the end turnover of the whole chain. Yes, if there is no vertical integration, each part of the chain just pays 17.5% on its markup, but what about a vertically integrated producer, that owns the forests, the mines, the factories, the lorries and the retail outlets? It’s the same amount of VAT either way, ergo it is a turnover tax.

b) The cheque to HMRC is 17.5% of turnover minus input VAT. So a company with £117,500 gross turnover hands over (say) £10,000 to HMRC and £7,500 to the supplier. Or any two other numbers that add up to £17,500.

c) Let’s imagine we scrapped this nonsense of VAT registered businesses charging other VAT registered businesses VAT, with the supplier paying the tax and the customer deducting it from its own liability. Instead, we could just exempt such business-to-business supplies, and have the retailer charging the full 17.5% to the non-VAT registered end-user (as they do in some countries). The total tax paid would be the same. So it’s a turnover tax on the retailer. The suppliers may think that they are VAT exempt but this is nonsense (go back to example of fully vertically integrated supplier).

The Goblin King, The Badger and The Prince of Darkness have all been on record in the past couple of days, wringing their hands about the fact that UK banks aren't doing what the government wants them to do (which is to prop up house prices via more reckless mortgage lending and, to a lesser extent, not pull the rug from under businesses), despite the massive taxpayer-funded bail out.

So, for the benefit of these senior government figures, here's my Noddy's Guide on How Banking Works.

1. In normal circumstances, money comes in from depositors, bondholders and shareholders ('investors'), the bank records this as liabilities and lends it out to mortgage borrowers and businesses ('borrowers') and records these advances as assets (banks are just middlemen, of course, they don't actually create new money - see footnote*). The bank receives repayments of interest and capital from the borrowers ('income'), and after deducting running expenses, the income is passed on to the investors as interest, dividends, bond redemptions and share buy backs ('expenses'). As long as there's confidence that house prices will continue rising, in the economy and in the bank, this all hums along quite smoothly:

2. Until one day, confidence in ever rising property prices and debt-financed businesses starts to erode; banks are less willing to lend, the value of the bank's assets (i.e. loans to borrowers) starts to look shaky, and these borrowers start running up arrears. In this case, the arrow from the investors flips round - they want their money back; or at least, they want to shift it from higher risk to lower risk investments in banks (from bonds to deposit accounts, for example) or from higher risk to lower risk banks. This now becomes the bank's most pressing concern - how to keep their creditors (the investors) off their backs before they start a run on the bank:

3. "Oh dear," thinks the government, "The whole property price bubble, on which the illusion of ever rising wealth was based is bursting, and less-well capitalised businesses are going to the wall. Let's fire hose £37 billion of taxpayers' finest at the banks!"

The Big Fat Arrow in the last picture represents the £37 billion (with promises of plenty more to come):

4. Now, in the name of All That Is Unholy, who in their right mind expects banks to do anything other than hoard that cash to cover withdrawals from deposit accounts, to keep up interest payments and redemptions on bonds, maybe even to continue to paying dividends, to send a false signal that the bank is still profitable?

FFS, is the government really surprised that the semi-nationalised banks aren't all too keen to continue granting mortgages secured on plummeting property values?

As an unfortunate result of all this, debt-financed businesses (who may be otherwise well run and profitable) are going to the wall, which of course exacerbates the down turn, but do not imagine for one second that the government gives a hoot. Businesses are merely there to bid for government contracts (i.e. make donations to whichever party is in government), to pay as much tax as can be milked out of them and to create jobs for regulators.

* This statement is hotly disputed, for example see Arthur in the comments. I agree that banks can create loans apparently out of thin air, but you must always remember that for every £1 they lend to borrowers they need to receive another £1 from investors. So the result of a credit bubble is that a lot of borrowers end up owing a lot of investors a load of money, but the banks are just middlemen - the bank's net asset position does not change by one penny as a result.

I must admit that although I've only been a passive consumer of Strictly Come Dancing (because Mrs W insists on watching it), I found their 'last dance' strangely moving. Yes, I know it's cynical escapism, dumbing down and completely staged, but hey ...

Saturday, 22 November 2008

I have been pointing out for ages that VAT is The Worst Tax Of All, to little avail. Happily, the CEBR got a lot of coverage recently with their suggestion that the standard rate of VAT be reduced from 17.5% to 12.5%. Former Chancellor Ken Clarke suggested in an interview in today's Times that the best thing that The Badger could propose in his much vaunted Pre-Budget Report next Monday would be to reduce VAT to 15% (as a good EU-phile, Fatty Clarke knows that the EU demand that each country has a standard rate of no less than 15%), and hey presto ...

From The Times (breaking news): "Gordon Brown to cut VAT as winter recession bites" (note: not "Alistair Darling to cut VAT ..."). A similar story has appeared on The Telegraph's website.

Equally heartening, another of the bullet points in that article suggests that there'll be: "A tax exemption for foreign dividends, designed to persuade UK-based multinationals not to relocate abroad."

I have also been saying for ages (e.g. item 2 here) that the UK ought to exempt foreign dividends from tax, just like all other civilised European countries (i.e. all of them except the UK and Ireland).

The static 'cost' per annum of these two eminently sensible tax reduction simplification measure would be around £12 billion for VAT and £1 billion for the foreign dividends, the dynamic 'cost' will be less than half of that, i.e. about one per cent of current government spending, one-fifth of which is pure waste and corruption anyway.

The Chancellor, Alistair Darling, is spending the weekend putting the final touches to a package of tax cuts and big increases in public spending. The measures, designed to revive the flagging economy, are to be announced in Monday's pre-Budget report. It is understood Mr Darling will say tax cuts will only be short-lived and taxes will have to rise in the future.

*sigh*

1. The gummint has already extended current spending far, far beyond the core functions of the state (being those things which only the state can do and which 'add value'; law and order; refuse collection; street lighting; immigration control; defence etc), in other words it is wasting huge sums of money - at least £100 billion per annum. (I'm not counting pure redistribution i.e. welfare and pensions as gummint spending for these purposes). So there's no point wasting even more.

2. The State can also spend money on longer term 'capital' items, like transport infrastructure, which can add enormous value, far in excess of the cost, provided they stick to the budget (which they never do). But these projects take years to plan and implement, so initially there is an additional burden on the economy, which is exactly what we don't want right now. In fact, the State spends most of its time preventing private companies from investing their own money in infrastructure (see Heathrow, Kingsnorth, Donald Trump's golf course etc).

3. Then there's the marginal interest rate. Let's assume our National Debt is 40% of GDP, on which we have to pay an average interest rate of 5.4%. The higher the debt-to-GDP ratio, the higher the interest rate, of course. If they cheerfully borrow another 10% of GDP, the overall average interest rate might not go up much, let's say to 5.7%, but that's a marginal interest rate of 6.9%*

4. Then there's the hotly disputed idea of Ricardian Equivalence,"...an economic theory which suggests that it does not matter whether a government finances its spending with debt or a tax increase, the total level of demand in an economy will be the same. It was proposed, and then rejected, by the 19th century economist David Ricardo." He appears to have rejected it because ".. if people had rational expectations they would be indifferent between the two systems, but since they do not have them, they are subjected to a fiscal illusion which distorts their decisions."

IMHO, it is far simpler than that, and it is irrelevant whether people are entirely 'rational' (whatever that means) or not. It is a cash flow thing: it makes absolutely no difference whether we all pay an extra £1,000 tax this year; or whether the governments borrows £1,000 from each of us. Either way it's money out of our pockets. And whether we realise it or not, that money can only be repaid in future by taking more money out of taxpayers' pockets to transfer to the pockets of those people who lent the government the money in the first place.

The theory goes that the trick only works if people are dumb enough to overlook the fact that in cash terms, they'll never get the money back that they are lending the gummint now. But if household spending is to be maintained, this in turn has to be funded out of borrowing, because people have less cash of their own (having lent some to the gummint). Which is what got us into this mess in the first place.

OK, things get more complicated if the gummint borrows the extra money from abroad, but ultimately it must cancel itself out.

* You work out the marginal interest rate thusly: 40% of GDP @ 5.4% costs 2.16% of GDP; 50% of GDP @ 5.7% costs 2.85% of GDPTherefore, that extra borrowing of 10% of GDP has cost us an extra 0.69% of GDPTherefore the additional 10% of GDP that we borrow is at an interest rate of 6.9%.

Friday, 21 November 2008

LabourHome have got themselves all in a tizz over a map of the UK that allegedly shows the areas with the highest concentration of BNP members, because it looks very similar to the map showing Labour constituencies, from which they deduce that the BNP are an electoral threat to Labour in particular.

Well, duh. We knew that anyway. Further, we are well aware that:

a) Labour do best in towns and cities; the Tories do best in rural/suburban areas.

b) You could take a map showing areas with the highest concentrations of people with any random characteristic (left handedness, a liking for chocolate, membership of a particular political party) and you'd find that that this looks similar to the BNP map - because such a map would simply show the areas with the highest population densities, i.e. towns and cities, which happen to be areas where Labour tend to do well.

I found your report that overweight women are likely to be criminals (Metro, Wed) interesting. Is it because they eat too much and then need to steal to fuel their habit? Or is it to do with the chemicals in the food they eat?

I've stumbled across this blast from the past illustrating how debt-for-equity-swaps work in real life:

In a move to dramatically strengthen its balance sheet, cosmetics company Revlon has brokered agreements with fund managers Fidelity Investments and MacAndrews & Forbes to swap bonds for company shares. After years of surviving on emergency cash infusions from financier Ronald Perelman, analysts say that the company may have finally found a longer-term financial solution.

The refinancing agreement will cut the company’s $1.9 billion debt load almost in half with a debt reduction amounting to $930 million...

The news is a boon for holders of Revlon’s bonds since the value of these offers either exceeds or approaches [the par value of the bonds] based on the company’s current stock price. This is reflected in the spreads on the firm’s bonds, which are no longer trading at distressed levels.

Which is exactly how the banks would have dealt with things, had the government not lumbered in with £37 billion of taxpayers' finest.

I have perhaps been guilty of extolling the merits of replacing all existing property/wealth based taxes with Land Value Tax or replacing the entire Welfare State with a Citizen's Income scheme, so today, let's look at slimming down The State and simplifying/flattening The Big Taxes - Income Tax, National Insurance, VAT and Corporation Tax - i.e. taxes on enterprise, work and investment. The total revenues from these four taxes was expected to be about £395 billion in 2008-09 (HMRC, Table 1.2).

Step 1 is to work out what sort of savings the State can make without actually reducing 'frontline services'. A cautious estimate* would be around £100 billion per annum, so that means we need revenues of £295 billion per annum.

Step 2 is to work out what flat tax rate we'd have to apply to incomes/profits currently liable to Income Tax, Insurance, VAT and Corporation Tax (which are applied more-or-less at random to different types of income - which is why marginal tax/WTC withdrawal rates are anywhere between 20% and 77%, with an overall average total rate of 46%) to generate £295 billion per annum.

Step 3 is to sketch out a Laffer Curve. We know that at tax rates of 0% or 100% that revenues will be £nil; and have also established - on the basis of marginal tax rates and employment rates of married/cohabiting and single mothers - that at a marginal tax rate of 49%, revenues are 37% of earnings potential and at a marginal tax rate of 75%, revenues are 41% of earnings potential. Subject to mucking about with formulae**, we get a chart (the x-axis is the tax rate imposed, the y-axis is the % of the potential tax base that is actually collected) that looks like this:

Step 4 is to map marginal rates on all the different types of income onto the likely actual yield (from the spreadsheet used to generate the above chart) and to establish that the current mish-mash probably collects about 33% of taxable incomes/profits, which works back to a 'tax base' of £1,200 billion, which looks about right - UK's GDP is £1,400 billion, less £100 billion pure waste (see above) less £100 billion spent on core functions of the State - police, immigration control, defence etc

Step 5 is to read from the chart what flat rate would be required to generate tax revenues of £295 billion on a tax base of £1,200 billion. The answer is 31%*, give or take a %, which very conveniently is the same as the current basic rate of Income Tax plus Employee's National Insurance and a smidge more than mainstream Corporation Tax.

NOW That's what I call a flat tax system! For avoidance of doubt, there'd be no VAT, National Insurance nor higher rate tax. Corporate and personal incomes would be taxed at a flat 31% and that would be the end of that. Next.

* Maybe a flat rate of 31% wouldn't be enough to cover current expenditure on the five million remaining public sector employees, in which case a more radical 'zero-based-budget' approach would be to estimate that we need one million people to exercise the 'core functions' of the State (law'n'order, immigration control, defence etc), another million working in education (that's one adult per ten school age children) and another million in the health sector (the latter two services denationalised and replaced with health and education vouchers respectively, of course).

** The formula I used is to assume that the 'deadweight cost' to the economy (i.e. the amount by which the potential output of economy is depressed by the tax) = the tax rate to the power of 4. This gives us the 'tax base'. The actual tax is then the tax rate x the tax base, less a reduction of one-fifth to account for tax-free personal allowances and hardcore evaders. This is not particularly scientific, but produces a 'curve of best fit'.

BORIS Johnson has announced plans to create 50,000 affordable homes and kickstart the housing market. The Mayor said he wanted to build the ambitious total, including 30,000 social housing units, within three years. The £5 billion scheme will attempt to get middle-income families on the property ladder and ditch previous mayor Ken Livingstone's target that all new schemes are 50 per cent affordable...

*sigh*

Houses in London are becoming more affordable by the day and rents are falling. The housing market does not need to be 'kickstarted'; we are now at the fag end of a property price bubble; prices will overshoot on the way down and then recover, and then the next bubble will start and so on ad infinitum. Or until they introduce Land Value Tax, whichever is the sooner. As to "middle-income families", I can see the point of redistribution from rich to poor - preferably via a Citizen's Income-style welfare system - but redistribution from middle-income-to-middle-income? What's the point?£5 billion is a heck of a lot of money; there are about 2 million households in Greater London, so that works out at £2,500 extra Council Tax per existing household. So he's just lost 2 million votes in order to win 30 thousand.

Twat. Thank God I don't live in Greater London any more.

The article continues with endless bullet points, which I could fisk individually, but you get the overall drift.

Wednesday, 19 November 2008

Although the stat's are three or four years old, the employment rates for married/cohabiting parents (91% for fathers and 71% for mothers) haven't changed much since. Hence 75% of mothers whose partner is in work are also in work (68/91). The same sources also say that about 55% of lone mothers are in work.

Agreed, unemployed single mothers are synonymous with The Underclass, but maybe marginal tax/benefit withdrawal rates have something to do with it? Remembering always, that without these high marginal tax/benefit withdrawal rates (and generous out-of-work benefits for suitably undeserving claimants) there wouldn't be such a large Underclass in the first place.

The table in my previous post shows that the typical marginal tax/benefit withdrawal rate for married/cohabiting mothers with a working partner is 49% and for a single mother it is 75%. So, one lesson to learn is that higher marginal tax/benefit withdrawal rates discourage employment (no surprises there).

Further, maybe this will help us sketch out the Laffer Curve. We know that at an overall income tax rate of zero, total revenues are zero. The above example helps us plot two more points: if 75% of a group of people subject to a tax rate of 49% are in work, it's fair to assume that the total tax they pay is 37% of their total earnings capacity (75% x 49%). In contrast, only 55% of an otherwise similar group with a tax rate of 75% are in work, so the total tax they pay is 41% of their total earnings capacity (55% x 75%).

Thus a one-half increase in the tax rate (from 49% to 75%) only leads to a one-tenth increase in tax revenues (from 37% of earnings capacity to 41%). Unfortunately, this does not tell us whether the 'top' of the Laffer Curve is at a rate between 49% and 75%; or whether a Big Government, hell bent on squeezing every last penny from its citizens, ought to be aiming for marginal tax rates in excess of 75%. From experience, I would guess the former; and that the 'top' of the Laffer Curve is somewhere between 60% and 70%.

Here's the table included in my earlier post, which I have now expanded to include the total marginal tax/benefit withdrawal rates faced by basic rate taxpayers who are entitled to Working Tax Credits and hence face the first and second withdrawal rates (i.e. withdrawal rates above and beyond 'normal' tax rates):I have highlighted the rates for basic rate employees entitled to Working Tax Credits, because it is useful to bear these in mind when looking at the employment rates of married/cohabiting mothers with an employed partner; as against the employment rates of single mothers (to be covered in a subsequent post). This in turn shows the impact of high tax/benefit withdrawal rates on employment levels and helps us sketch out the Laffer Curve.

Tuesday, 18 November 2008

From today's LondonPaper:Wrong. The UK has run experiments with reducing Business Rates (for example, exemptions for vacant buildings, or blanket exemptions for 'deprived' areas), and all that happened was that rents or property values adjusted upwards. The simplest and best way to fix this unintended consequence of Business Rates is to scrap the element that relates to the value of the building - whether occupied or vacant - and just tax the bare site value.

All site owners have a notional or actual interest cost relating to the capital value of the site. A tax on the site value would depress the notional cost by the amount of the tax; in some cases actual costs would go up, in some cases they would go down, but as economic decisions are based on notional rather than actual costs, a tax on site values would not impede rational decision making. In other words, each site owner would develop his site to the fullest extent.

The other, even more fundamental point, is that Business Rates are levied and collected locally, but pooled nationally and then redistributed. As a local politician, Boris can make London a more attractive place for businesses - by sorting out things within his remit like transport and policing; if Business Rates (or Site Value Rating) could be collected and spent locally, then there'd be a much better incentive for him to do his job properly, and there would be an automatic cost-benefit analysis to all his decisions.

There's probably more to this story than meets the eye, and we can only begin to guess at what sort of behind the scenes negotiations take place between the Saudis, the pirates and the oil, shipping and insurance companies, but apparently it is quite easily to hijack such a ship.

It is also apparently normal for a ransome to be paid for return of ship and crew, but isn't this just inviting more attacks? If a relatively small, poorly equipped gang of pirates can hijack a ship several hundred miles out at sea, surely it can't be too difficult for anybody else* to take control of it again, now that we all know exactly where it is?

Yes, it would be a tragedy if the crew members came to harm, and if they did, seamen's wages might increase in future, but if NATO or the Saudis managed to wipe out the entire gang of pirates as a warning to others, that would surely reduce the likelihood of future attacks and hence reduce insurance costs by an equal and opposite amount.

Just sayin', is all.

* Whether that is NATO, the Saudis, mercenaries acting on behalf of the shipping or insurance company, or indeed yet another gang of pirates is neither here nor.

Monday, 17 November 2008

Cherie Blair, speaking at the City Women’s Network 30th anniversary gala dinner at Stationers’ Hall ... “So much has changed in the past three decades, it seems hard to remember that [30 years ago] there was still a widespread view that women could not get to the top no matter how talented they were or how hard they worked,” Cherie told an audience of rapt City ladies.

As opposed to today, where an ugly witch with neither useful skills nor a shred of decency can make it straight to the top by virtue of who her husband is, eh?

Creon Corporation, a residential property finance group, claimed top spot on the Aim market leaderboard, with a surge of 171 per cent to 9½p. Traders had all but written off the company, which lends to small scale property developers, but yesterday it announced what might qualify as the London market's smallest ever debt-for-equity swap. Some £39,517 owed to a number of suppliers - including one director - has been settled by the issue of just under 1m new shares at 4p apiece.

Exactly. If the underlying business has value (and with a mortgage company there is always some value to the assets side, unless it turns out that 100% of their mortgage advances are irrecoverable), creditors have a choice between insisting on contractually agreed repayment terms, thus possibly forcing the business into administration with a fire sale of assets at less than recoverable values or waiving that payment in exchange for a share in the business. In other words a short term claim is converted to a long term claim.

And there's no need for ham fisted government intervention, market forces make this happen. Indeed, once a government starts guaranteeing a company's liabilities, it is far less likely to happen.

Channel 4 at 8 o'clock today: The Ascent of Money "In a new and very timely landmark series, historian Professor Niall Ferguson tackles the story of money and the rise of global finance. Ferguson argues that behind every great historical phenomenon - empires and republics, wars and revolutions - there lies a financial secret."

In which said Professor will probably completely miss the point and blame it all on 'banks', whereas the more fundamental truth is that politicians welcomed the property price bubble because it led to an illusion of ever rising wealth. And you can't have a property price bubble without a credit bubble, so certain bonus-hungry employees at banks just made hay while the sun shone.

Followed immediately by Location, Location, Location: A Survival Guide"With the UK heading towards a recession, the property market looks more treacherous than ever before. So, in this 90-minute special, Kirstie and Phil give their expert advice on how to survive the credit crunch, offering comprehensive recommendations to help home owners, buyers and sellers from all over the country make the right moves in this unsettled market."

A prime opportunity for a more specialised version of Bullshit Bingo, methinks. I tip 'shortage of housing'; 'pent up demand'; 'long term investment'; 'it's a home not an investment'; 'freeing up credit markets'; 'fundamentals'; 'buying opportunity'; 'the government should ...' and 'Stamp Duty cuts for first-time buyers'.

People who use prostitutes will soon face a hefty fine and a criminal record as part of a new crackdown on the sex trade. They will be breaking the law if they pay for sex with a woman being 'controlled for another person's gain' under the changed rules. It is currently legal to pay for sex as legislation concentrates on brothel-keeping, soliciting for sex, and kerb crawling.

One of the general ground rules in criminal law is that the more serious the offence, the higher the burden of proof; and further, for more serious offences, it is not sufficient to show that you committed the crime, but also that you intended to do so.

At the bottom end of the scale are strict liability offences, such as selling alcohol to minors or exceeding the speed limit. It is irrelevant whether you knew that the kids were under 18 or that you were speeding. Contrast that with murder, where the prosecution not only has to prove that you did it, but also that you were aware that your attack would at least cause some physical harm. Fair enoughski.

So, although the maniacs in power accept that it is currently legal to pay for sex, they intend to make it a serious offence to pay for sex in certain vaguely defined circumstances. Short of doing the sensible thing and issuing prostitutes with licenses to act as such, wouldn't somebody accused of such a crime be able to wriggle of the hook by saying that he was not aware that the woman was "being controlled for another person's gain"?

And finally, if The Powers That Be can prove that a woman was being forced into it, wouldn't it make more sense to prosecute her pimps for kidnap, breach of immigration controls, false imprisonment, rape, breaching Consumer Credit Act, usury, living off immoral earnings, breaching National Minimum Wage and Working Hours rules, tax evasion, conspiracy and so on?

Here's a summary of the effective marginal tax rates faced by the UK economy*:

Commonsense tells us that if tax rates are high enough, the additional extra tax revenue generated by a further hike in rates is cancelled out by a corresponding fall in economic activity, or indeed straightforward tax evasion; a phenomenon known as The Laffer Curve.

Nobody knows what the rate at the top of The Laffer Curve is, my gut feeling is that it is sixty per cent or so; I once read a convincing argument that for employment income it was as high as seventy per cent. As a simplification campaigner, it strikes me that we'd be a lot better off if there were a flat rate on all types of income, let's say 40% for starters**. The fall in income tax collected from those currently suffering a 48% rate would not be 16% (i.e. 8/48), it might be half that, say 8%. Conversely, the tax collected from those currently paying 20% would nearly double. In other words, to achieve fiscal neutrality, a flat rate across all sources of income would be lower than a simple average of all the disparate rates.

It is also important to remember that the sectors of our economy that have benefitted the most from the house price and credit bubbles (the bursting of which has now caused a global recession, if not worse) are either exempt from VAT (banks, speculating in housing) or VAT zero-rated (construction of residential dwelling). But the real underlying distortion is that capital gains from housing are, by and large, tax exempt.

Even assuming that house prices fall 40% from their peak by 2010, using Nationwide's figures, house prices have been increasing at a compound rate of 8% (not adjusting for inflation) for the past half a century. So if we accept that 40% is a fair rate**, in fairness we ought to have an annual 3.2% flat rate tax on housing wealth*** as well (in place of all existing property related taxes, such as Council Tax, Stamp Duty Land Tax, Inheritance Tax, TV licence fee, Insurance Premium Tax ...) to ensure that all types of income and gains are taxed at the same rate. Such a tax would also act like a higher interest rate and keep house prices low and stable in future.

* I have made a lot of simplifying assumptions; for marginal or loss-making businesses, the overall effective rate is over 100%. The maths is tortuous; the most important rate - the rate suffered by basic rate employees of a VAT-able business - is calculated as £100 gross income divided by 1.175 (to strip out VAT), divided by 1.128 (to strip out Employer's National Insurance) and multiplying the result by 69% (to strip out basic rate tax and Employee's National Insurance). The effective rate on reinvested business profits is only 0% or 15% if profits are spent on current expenditure that attracts full tax relief; the effective rate on expenditure qualifying for capital allowances will be higher than this, and the effective rate spent on land and property will be close to the rate on retained profits.

** Yes, forty per cent is much higher than I'd like, the lower the better obviously, but you have to start somewhere. Forty per cent just happens to be the average of the figures in the table.

*** i.e. 40% x 8%. Of course, conceptually, a tax based purely on location values rather than total property values is vastly preferable, that's a different topic. And in case you think this is a loonie left-wing idea, Professor Patrick Minford suggested in his Agenda For Tax Reform that notional rental income from owner-occupied housing be taxed at the same rate as any other income. OK, he assumed notional rental income of 6% of property values and a flat tax rate of 22%, but that's details.

Continuing my occasional series, The Badger has noticed that trying to force commercial banks to increase mortgage lending to their crazy 2007 levels in the face of plummeting house prices is trickier than he expected.

Not a problem! The gummint is now going to completely reverse its eminently sensible policy of running down Northern Rock's mortgage book as fast as possible (by simply making sure that NR's mortgage deals were the least attractive on the market). The new plan is to give NR long term taxpayer funded loans and guarantees in order to try and reflate the housing bubble.

H/t Stillthinking at HPC, who adds "... this must count as an extension of government borrowing and so push the pound down further, and ... push up real long-term interest rates."

A couple of readers have emailed me on the topic of currencies, and whether they should diversify out of GBP. Always remembering that your guess is as good as mine when gazing into the future, and that I am not offering investment advice (cont. page 94), let's look at GBP against a basket of other currencies since 1990:To sum up, if you're thinking about diversifying out of GBP, you've left it a bit late - GBP has already lost 25% of its value in the last year-and-a-half. I have no idea how much further it will fall, but I personally doubt that it's got much further to go.

But let's jump in a time machine back to 1995/96, the last time that GBP was clearly undervalued*. If your 'home' currency was anything but GBP, you could have made a 25% profit in two years by buying GBP in 1996 and bailing out in 1998. And what would have been the best strategy in 1998? The answer is, sell GBP and buy JPY:Then in 2000 you should have banked a 30% profit on your JPY and bought EUR:With the right timing, you could have made another 20% on top of the interest you are earning in the years to 2004. Things were then quite dull and uneventful for three years, but whatever currency you were in for those three years, the strategy in 2007 would have been to buy JPY again (see second chart) and make over 30% in the space of a year.

Which brings us back to today's date. If you subscribe to my theory that currencies always revert to the mean, the two currencies that appear most likely to be undervalued* are GBP (trading at 83% of its long run average value) and AUD (trading at 88% of its long run average, up from a seven-year low of 82% that it reached at the end of October).**

Alternatively, if you believe that GBP can genuinely go into free fall, like the Zimbabwean Dollar, by all means ignore everything I've said and diversify out of GBP.

* Currencies are neither 'strong' nor 'weak'; they are either overvalued or undervalued.

** As luck would have it, I shifted out of JPY and into AUD at the end of October, which has since clawed its way back from 39 pence to 44 pence. Sweet.

Just for completeness, here are the charts for USD and CHF:You can make up your own mind about whether USD will continue to rise, but CHF seems to be at the very top of its trading range, and I wouldn't bother: